Inflation is on the rise across the globe. In the United States, inflation increased nearly 8% over the last year. This is the highest inflationary rate in roughly 40 years.
To battle back against inflation, the U.S. Federal Reserve has decided to raise interest rates. Decisionmakers expect the policy rate to increase to 1.9% by the end of this year. Some bullish Fed members want to see the rate go as high as 3%.
What do higher interest rates mean for consumers? Read on to learn what rate hikes will do to the economy. Explore four ways that rising interest rates will affect your finances.
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1. Housing Expenses
Rising interest rates have an immediate impact on mortgage rates. As the Federal Reserve increases its policy rates, mortgage rates tend to follow.
This means that consumers are losing purchasing power in the real estate market. A greater share of their budget is going towards financing expenses. They can afford less because of the changing dynamic.
For real estate, 2022 is unpredictable because analysts are unsure how consumers will respond to higher rates. Real estate predictions for 2022 are still fairly optimistic but there is a chance that demand plummets due to higher financing costs.
2. Credit Cards
Many consumers have gotten used to low-interest rates for credit cards. There are exceptional offers for introductory 0% Annual Percentage Rates (APRs) on most major credit cards. It is not uncommon for credit cards to remain interest-free for one to two years.
With rising interest rates, this is going to change. Credit card companies are certain to tighten up their offers.
Also, consumers are going to pay more in interest on their credit card debt. This is especially true for consumers who have variable interest rates on their cards.
3. Auto Loans and Leases
It is going to cost more to finance or lease your vehicle. Higher interest rates have a direct impact on the vehicle market.
Your local car dealership is not going to be able to secure the same interest rates you are accustomed to. The end result is going to be higher monthly payments for your vehicle.
4. Savings Account
There is some good news associated with higher interest rates. Your savings account is finally going to generate more interest income.
Over the past decade, consumers have gotten used to getting close to zero out of interest accrued on their savings accounts.
It was not always like this for consumers. Back in the 1980s and ‘90s, it was commonplace for bank account holders to get decent interest yields on their savings account balance.
Four Ways That Rate Hikes Affect Your Bottom Line
It is time to prepare for the adverse impact that rate hikes will have on your finances. It is going to be more expensive to finance major items like homes or vehicles. Also, holding credit card debt is more difficult with higher interest rates.
The good news is that you have time to prepare. If you enjoyed this article about how rate hikes impact your wallet, check out our blog for more great content.